PLANSPONSOR - April/May 2021 - 15

Prudence
And Loyalty
Under ERISA
THE EMPLOYEE Retirement Income
Security Act (ERISA) requires plan fiduciaries
to act with both prudence and
loyalty, but how should plan sponsors
interpret these terms?
Charles Field, a partner and co-chair
of Sanford Heisler Sharp's financial
services litigation practice group, says,
under the duty of loyalty, employers must
act solely in the interest of participants.
" Courts have said that this fundamental
duty requires fiduciaries to act with 'an
eye single' to the interests of participants
and beneficiaries, " Field explains. " This
means fiduciaries must avoid and mitigate
conflicts of interest when selecting
and monitoring a plan's investments and
in any other dealings with the plan. "
ERISA includes complex prohibited
transaction rules, such as Section 406,
that are designed to prevent self-dealing,
notes David Klimaszewski, a partner at
Culhane Meadows PLLC. Further, the
Internal Revenue Code (IRC) contains a
rule in Section 401(a)(2) requiring that
plan assets be used " for the exclusive
benefit " of participants and their beneficiaries.
For example, providing goods
and services that are overpriced or that
perform poorly are common instances of
prohibited transactions.
In addition, financial institutions-
including banks, brokers and investment
advisers-that offer their own products
and services to their company's plan will
always face duty of loyalty questions,
Klimaszewski adds.
When it comes to the duty of
prudence, ERISA says fiduciaries are to
act with " the care, skill, prudence and diligence
of a prudent person acting in a like
capacity and familiar with such matters, "
Field says. " Courts have said prudence
25 - 34
years old
dictates that fiduciaries vigorously and
independently investigate and regularly
monitor each of the plan's investment
options with the skill of a prudent expert. "
For example, a prudent decisionmaking
process would include evaluating
the reasonableness of a plan's service
provider fees by comparing them against
the marketplace. While the duty does
not require a fiduciary to obtain the least
expensive option, a fiduciary that fails
to consider competitive bids runs the
risk of being charged with an imprudent
process, Field says.
A prudent expert would also want to
measure an investment option's performance
relative to both a recognized
benchmark and investments within a
comparable peer universe.
It is worth noting that ERISA's
TIDBIT
Health Plan Overkill
According to the U.S. Agency for Healthcare Research
and Quality's Medical Expenditure Panel Survey, in 2018,
nearly 60% of employees had less than $2,000 in medical
claims, and 16% had no claims. For most workers, a highdeductible
health plan (HDHP) with lower premiums would
be a better choice than a preferred provider organization
plan with higher premiums.
How Much Employees Would Have Saved, in 2018, With an HDHP
84%
78%
67%
35 - 44
years old
45 - 54
years old
Source: Voya Financial Thought Leadership Council and SAVVI Financial LLC
69%
prudent-man standard is a bit more
flexible than what common law states,
Klimaszewski says. " ERISA fiduciaries
may take into account more than just
investment performance, such as the plan's
cash flow, upcoming distributions or the
liquidity of the investments, " he says.
Klimaszewski goes on to explain that
prudence and loyalty apply to all fiduciary
decisions made by the sponsor, but they
are most important when selecting service
providers and choosing investments.
Selecting the right service provider,
whether it be a trustee or third-party administrator
(TPA), is crucial. In this case, the
sponsor must investigate providers before
making a decision and consider all of the
costs and the quality of services provided,
including responsiveness and accuracy,
Klimaszewski says. -Amanda Umpierrez
55 - 64
years old
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